X5 Retail Regulatory News (FIVE)

X5 REPORTS 12.9% REVENUE GROWTH IN Q2 2020

EBITDA MARGIN UNder IAS 17 REACHES 8.4%

ü X5 delivered revenue growth of 12.9% year-on-year (y-o-y) on the back of solid like-for-like (LFL)(1) sales, selling space expansion and ongoing store refurbishments.

ü EBITDA under IAS 17 increased by 14.4% y-o-y in Q2 2020, reflecting gross margin expansion and positive operating leverage effect. EBITDA margin reached 8.4% (13.3% under IFRS 16).

ü Gross margin(2) under IAS 17 improved by 23 b.p. y-o-y to 25.3% (25.6% under IFRS 16) in Q2 2020, mainly driven by decreased shrinkage and a lower share of promo.

ü SG&A expenses under IAS 17 (excl. D&A&I, LTI and share-based payments) before reclassification(2) decreased by 17 b.p. y-o-y to 17.1% (12.7% under IFRS 16) as a percentage of revenue mainly due to lower staff and utilities costs.

ü Net profit under IAS 17 increased by 20.5% y-o-y in Q2 2020. Net profit margin under IAS 17 increased by 21 b.p. to 3.3% (3.0% under IFRS 16).

ü The total impact of COVID-related costs on the company's EBITDA in Q2 2020 is estimated at RUB 1.78 bn.

ü The net debt/EBITDA ratio under IAS 17 was 1.68x (3.28x under IFRS 16) as of 30 June 2020.

Amsterdam, 13 August 2020 - X5 Retail Group N.V. ("X5" or the "Company"), a leading Russian food retailer (LSE and MOEX ticker: FIVE) that operates the Pyaterochka, Perekrestok, and Karusel retail chains, today released its interim report for the three months (Q2) and six months (H1) ended 30 June 2020, in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union. The interim report has been reviewed by the independent auditor and has not been audited.

X5 Chief Executive Officer Igor Shekhterman said:

"The COVID-19 pandemic has had a significant impact on X5's business, employees and customers. However, thanks to our robust and advanced business processes, we were able to respond to the rapidly changing environment in an effective and efficient way. I want to thank every member of the X5 team for their dedication to keeping each other and our customers safe while continuing to provide high-quality and essential food retail services to local communities in 66 regions of Russia.

"The teams at Pyaterochka, Perekrestok, Karusel and our other business units all made important contributions to our Q2 2020 performance by adapting to customer demand, reducing operating costs and making smart investments to support profitability and returns.

"On top of the progress in our offline operations, in the second quarter X5 also took the leadership position in online grocery in Russia. This market segment saw explosive growth in Q2 2020 and we expect it may triple in value during 2020. The overall profitability of X5's online platforms was well ahead of budget targets in Q2, and our online operations even saw positive EBITDA performance in May 2020.

"I am very pleased with the strong financial results that X5 achieved in Q2 2020. Our company continues to increase the revenue gap versus main competitors in Russian food retail. In terms of absolute revenue from groceries, X5 is larger than our closest competitor by 42%, and this absolute revenue gap increased by another 16% in H1 2020. X5's strong quarterly results, especially our solid profitability, are driven by fundamental factors. Our improved margins, for example, were based on a broad set of components from gross margin to operating costs. They will have a lasting effect in the quarters ahead."

Profit and loss statement highlights(3)

* For more details on the impact of IFRS 16 please refer to the section "Effect of IFRS 16 on X5 Retail Group's financial statements".

Net retail sales

Total net retail sales growth reached 13.2% y-o-y in Q2 2020, driven by:

§ 4.3% increase in LFL sales; and

§ 8.9% y-o-y increase in net retail sales from net new space, resulting from a 10.7% y-o-y rise in selling space.

Selling space by format, square meters (sq. m) 

Q2 & H1 2020 LFL store performance by format, % change y-o-y(6)

In Q2 & H1 2020, LFL sales performance remained strong at 4.3% and 5.0% y-o-y, respectively.

LFL sales by traffic and basket in Q2 2020 reflect the impact of the COVID-19 lockdown, with less frequent customer visits to stores and larger purchases per visit.

For more details on net retail sales growth please refer to X5's Q2 2020 Trading Update.

Gross profit margin

The gross profit margin under IAS 17 increased by 23 b.p. y-o-y to 25.3% (and increased by 22 b.p. to 25.6% under IFRS 16) in Q2 2020. This growth was mainly due to a decrease in shrinkage vs Q2 2019, and a lower share of promo. Gross margin performance of the core formats (Pyaterochka and Perekrestok) was higher compared to the X5 average, mainly due to the ongoing Karusel transformation.

Selling, general and administrative (SG&A) expenses (excl. D&A&I)

* For more details on the impact of IFRS 16 please refer to the section "Effect of IFRS 16 on X5 Retail Group's financial statements".

In Q2 2020, SG&A expenses excluding D&A&I, LTI and share-based payments under IAS 17 as a percentage of revenue increased by 21 b.p. to 17.5% (increased by 28 b.p. to 13.1% under IFRS 16) due to reclassification(2). Excluding reclassification, SG&A expenses decreased by 17 b.p., mainly due to lower staff and utilities costs as percent of revenue.

Staff costs (excluding LTI and share-based payments) as a percent of revenue increased by 9 b.p. y-o-y in Q2 2020 to 7.8%, due to reclassification(2) partially offset by positive operating leverage effect, lower personnel turnover (annualised turnover declined to 41.7%), an 8.6% increase in labour productivity and release of a COVID-related payroll provision created in March.

LTI and share-based payments expenses amounted to RUB 527 mn in Q2 2020 based on achieving both targets during the period: maintaining leadership by revenue and achieving leadership in terms of enterprise value multiple relative to peers.

Utilities costs as a percentage of revenue in Q2 2020 decreased by 10 b.p. y-o-y to 1.8% due to positive operating leverage effect.

Other store costs under IAS 17 as a percentage of revenue increased by 14 b.p. to 1.2% (and increased by 14 b.p. to 1.2% under IFRS 16), mainly due to reclassification(2) and additional measures related to the COVID-19 pandemic, such as masks and disposable gloves for personnel and additional disinfection hours daily for all stores.

Third party services under IAS 17 as a percentage of revenue decreased by 5 b.p. to 0.7% (decreased by 7 b.p. to 0.7% under IFRS 16), mainly due to lower marketing budgets during the COVID-19 pandemic.

Other expenses under IAS 17 as a percentage of revenue increased by 12 b.p. to 1.1% (increased by 18 b.p. to 1.0% under IFRS 16), mainly due to reclassification(2).

The total impact of COVID-related costs on the company's EBITDA in Q2 2020 is estimated at RUB 1.78 bn, the majority of which is related to personal protective equipment (masks, gloves, hand and mask sanitisers) and additional disinfection of premises (stores, office, distribution centres, trucks), followed by the impact from rent holidays that X5 granted to its small tenants in stores for the lockdown period. This also reflected smaller costs such as X5's initiative to trade socially important goods with a zero mark-up, additional inventory losses and additional working shifts in logistics during high-demand periods in April and May. The positive impact of the COVID-19 pandemic came from the more profitable category mix as consumers satisfied food demand in the absence of a normally-functioning HoReCa segment and reflecting the stay-at-home consumption mode. X5 also received better rent terms in the hypermarket segment during the lockdown, which enabled the Company to net the negative impact of the COVID-related costs.

Lease/sublease and other income

As a percentage of revenue, the Company's income from lease, sublease and other operations under IAS 17 totalled 0.7% (0.9% under IFRS 16) increased by 9 b.p. y-o-y (and increased by 17 b.p. y-o-y under IFRS 16) in Q2 2020, due to reclassification(2), which was partially balanced by the negative effect from rent holidays X5 provided to sub-tenants in its stores and lower income from sale of recyclable materials caused by the COVID-19 pandemic.

EBITDA and EBITDA margin

* For more details on the impact of IFRS 16 please refer to the section "Effect of IFRS 16 on X5 Retail Group's financial statements".

Segment reporting (under IAS 17)

Upon adoption of IFRS 16 the Management Board continued to assess the performance of operating segments based on a measure of sales and adjusted EBITDA under IAS 17.

The accounting policies used for segments are the same as accounting policies applied for the condensed consolidated interim financial statements, except for the accounting of leases under IAS 17 instead of IFRS 16.

In H1 2020, Pyaterochka's EBITDA margin under IAS 17 decreased by 9 b.p. y-o-y to 8.3%, driven primarily by targeted price investments in January-February and additional costs related to the COVID-19 pandemic in March-April.

Perekrestok's EBITDA margin under IAS 17 declined by 9 b.p. y-o-y in H1 2020 to 6.9%, mainly due to a lower rate of revenue growth driven by the closure to the public of shopping malls where some supermarkets are located as well as ongoing development and scaling up of Perekrestok.ru with a planned negative EBITDA, which was supported by high demand during the COVID lockdown.

In H1 2020, Karusel's EBITDA margin under IAS 17 declined by 175 b.p. y-o-y to 2.5%, driven by planned format downsizing as part of its transformation programme.

Other segments include 5Post in H1 2020 and Perekrestok Express in H1 2019 (the latter was closed in June 2019).

Corporate expenses under IAS 17 increased by only 1.2% y-o-y in H1 2020, reflecting the ongoing automation of back-office functions and savings on corporate travel during the pandemic.

D&A&I

Depreciation, amortisation and impairment costs under IAS 17 totalled RUB 15,395 mn in Q2 2020 and RUB 31,355 mn in H1 2020 (RUB 32,613 mn in Q2 2020 and RUB 64,898 mn in H1 2020 under IFRS 16), decreasing as a percentage of revenue by 4 b.p. y-o-y to 3.1% (increasing by 17 b.p. y-o-y to 6.6% under IFRS 16), (for H1 2020: up by 14 b.p. to 3.3% under IAS 17 and up by 20 b.p. to 6.7% under IFRS 16). This was due to revenue growth outpacing the growth of gross book value of assets.

Non-operating gains and losses

* For more details on the impact of IFRS 16 please refer to the section "Effect of IFRS 16 on X5 Retail Group's financial statements".

Net finance costs under IAS 17 in Q2 2020 increased by 7.7% y-o-y to RUB 4,473 mn (and increased by 7.9% y-o-y to RUB 14,550 mn under IFRS 16) due to higher gross debt and partially compensated by a decrease in the weighted average effective interest rate on X5's total debt from 8.14% for H1 2019 to 7.31% for H1 2020 as a result of declining interest rates in Russian capital markets, as well as actions taken by X5 to minimise interest expenses.

The positive net FX result of RUB 594 mn (RUB 1,770 mn under IFRS 16) in Q2 2020, compared to positive RUB 68 mn (RUB 349 mn under IFRS 16) in Q2 2019, was due to accounts payable nominated in foreign currency related to regular direct import operations. The positive result under IFRS 16 is also due to revaluation of foreign currency liabilities resulting from lease contracts denominated in foreign currencies.

In Q2 2020 income tax expense under IAS 17 increased by 22.0% y-o-y to RUB 5,778 mn (and increased by 24.5% y-o-y to RUB 5,402 mn under IFRS 16) in line with growth in pre-tax profit. X5's effective tax rate under IAS 17 for the quarter totalled 26.2% (26.8% under IFRS 16) (including the accrual of deferred tax on investments associated with potential dividend payments).

Consolidated cash flow statement highlights

* For more details on the impact of IFRS 16 please refer to the section "Effect of IFRS 16 on X5 Retail Group's financial statements".

In Q2 2020, the Company's net cash from operating activities before changes in working capital under IAS 17 increased by RUB 5,271 mn and totalled RUB 41,563 mn (and increased by RUB 7,612 mn and totalled RUB 65,211 mn under IFRS 16), reflecting business growth and sustainably high profitability. The negative change in working capital under IAS 17 of RUB 15,042 mn in Q2 2020 (RUB 15,968 mn under IFRS 16) compared to positive RUB 1,939 mn in Q2 2019 was mainly due to a decrease in accounts payable (due to the calendarisation effect and higher purchases at the end of March driven by the COVID-19 pandemic) and a larger increase in inventories, reflecting business growth and partially impacted by the COVID-19 pandemic. Inventory levels in Q2 2020 were in line with year-end 2019 levels.

Net interest and income tax paid under IAS 17 in Q2 2020 increased by RUB 3,048 mn, or 47.5% y-o-y, and totalled RUB 9,460 mn (increased by RUB 3,798 mn, or 24.2% y-o-y, and totalled RUB 19,517 mn under IFRS 16). The increase in interest paid was driven by the calendarisation of coupon payments. Income tax paid under IAS 17 increased y-o-y due to a one-off tax refund in Q2 2019, following tax overpayment in previous periods.

As a result, in Q2 2020, net cash flow generated from operating activities under IAS 17 totalled RUB 17,061 mn, down 46.4% from RUB 31,819 mn in Q2 2019 (and totalled RUB 29,726 mn, down 31.2% from RUB 43,213 mn in Q2 2019 under IFRS 16).

In H1 2020, net cash flows generated from operating activities under IAS 17 totalled RUB 57,102 mn, up 16.5% from RUB 49,031 mn for the same period of 2019 (and totalled RUB 83,938 mn, up 15.7% from RUB 72,558 mn for the same period of 2019 under IFRS 16) reflecting overall business growth and profitability, and despite the technical negative impact of calendarisation on payables at the end of H1 2020.

Net cash used in investing activities, which generally consists of payments for property, plant and equipment, increased to RUB 20,749 mn in Q2 2020 from RUB 18,186 mn in Q2 2019, driven primarily by the Pyaterochka refurbishment programme. For H1 2020, net cash used in investing activities increased to RUB 38,043 mn from RUB 35,559 mn in H1 2019.

Net cash generated from financing activities under IAS 17 totalled RUB 3,112 mn (net cash used in financing activities totalled RUB 9,553 mn under IFRS 16) in Q2 2020 compared to net cash used in financing activities of RUB 14,963 mn (net cash used in financing activities of RUB 26,357 mn under IFRS 16) in Q2 2019. For H1 2020, net cash used in financing activities under IAS 17 increased to RUB 26,328 mn from RUB 20,889 mn (and increased to RUB 53,164 mn from RUB 44,416 mn under IFRS 16) in H1 2019, reflecting the increased dividend payment.

Liquidity update

The Company's net debt/EBITDA ratio under IAS 17 was 1.68x (3.28x under IFRS 16) as of 30 June 2020.

The Company's debt under IAS 17 is 100% denominated in Russian roubles.

As of 30 June 2020, the Company had access to RUB 429,638 mn in available credit limits with major Russian and international banks.

Effect of IFRS 16 on X5 Retail Group's financial statements

Effect on gross profit

Gross profit and gross margin are higher by RUB 1,852 mn and 38 b.p. under IFRS 16 compared to IAS 17 in Q2 2020 (RUB 3,588 mn and 37 b.p. in H1 2020), respectively, due to the lease for distribution centres, which was previously part of cost of sales, but has been excluded from the gross profit calculation.

Effect on EBITDA, operating profit and finance costs

Lease expenses, other store costs, third party services and other expenses in the total amount of RUB 21,795 mn have been excluded from SG&A expenses in Q2 2020 (RUB 43,657 mn in H1 2020) under the new standard. Additional depreciation of RUB 17,218 mn related to leased assets has been added under operating costs in Q2 2020 (RUB 33,543 mn in H1 2020) under IFRS 16.

Financial costs increased by RUB 10,077 mn under the new standard compared to IAS 17 due to the interest expense on lease liabilities in Q2 2020 (RUB 20,098 mn in H1 2020).

The implementation of IFRS 16 increases the Company's EBITDA significantly, as lease expenditure previously recognised in the income statement is excluded. Adjusted EBITDA margin is 491 b.p. higher under the new standard compared to IAS 17 in Q2 2020 (499 b.p. in H1 2020). Interest expense on liabilities is recognised in finance costs, below the EBITDA level.

Effect on net profit

The net FX result is RUB 1,176 mn higher under IFRS 16 compared to IAS 17 in Q2 2020 (RUB 1,482 mn in H1 2020) due to the revaluation of foreign currency liabilities resulting from lease contracts denominated in foreign currencies.

IFRS 16 resulted in lower income tax expense due to lower profit before tax. The effective tax rate under the new standard is 26.8% and 28.9% in Q2 2020 and H1 2020, respectively.

Net profit and net profit margin are impacted by the IFRS 16 standard as a result of additional depreciation and interest, and are lower by RUB 1,503 mn and 30 b.p. under the new standard compared to IAS 17 in Q2 2020 (RUB 5,677 mn and 59 b.p. in H1 2020).

Effect on cash flow statement

The implementation of the new standard affects cash flow statement presentation but not the net change in cash result, as principal payments on leases will be classified as financing activities, prepayments are classified as investing activities, and interest payments are considered interest paid in operating activities.

Related Party Transactions

For a description of the related party transactions entered into by the Company, please refer to note 7 of the consolidated condensed interim financial statements.

Risks and Uncertainties

X5's risk management programme provides executive management with a periodic in-depth understanding of X5's key business risks and the risk management systems and internal controls in place to mitigate these risks. For a detailed description of key risks that the Company faces, please refer to the 2019 Annual Report. It should be noted that there are additional risks that management believe are immaterial or otherwise common to most companies, or that management is currently unaware of. The Company has assessed the risks for the first half of 2020 and believes that the risks identified are in line with those presented in the 2019 Annual Report. For a description of the financial risks faced by the Company, please refer to note 31 of the audited consolidated financial statements and the Company's 2019 Annual Report.

Interim report

The interim report, including the full set of reviewed IFRS condensed consolidated interim financial statements and notes thereto, is available on X5's corporate website at:  

https://www.x5.ru/en/Pages/Investors/ResultsCenter.aspx

Information on Alternative Performance Measures

For more information on Alternative Performance Measures, which provide readers with a more detailed and accurate understanding of the Company's financial and operating performance, please refer to pages 132-135 of the Annual Report 2019.

Note: Financial measures under IAS 17 are used in this press release as following adoption of IFRS 16 management continued to apply IAS 17 to leases for performance assessment purposes; this is mainly due to the fact that the investment community continues to focus on IAS 17 and management decision making processes, as well as the fact that internal reporting is also based on IAS 17. A reconciliation of IAS 17 and IFRS 16 figures is presented below in the section "Effect of IFRS 16 on X5 Retail Group's financial statements".

(1) LFL comparisons of retail sales between two periods are comparisons of retail sales in local currency (including VAT) generated by the relevant stores. The stores that are included in LFL comparisons are those that have operated for at least 12 full months. Their sales are included in the LFL calculation starting from the day of the store's opening. We include all stores that fit our LFL criteria in each reporting period.

(2) Starting from Q2 2020, the Company reclassified income from the sale of recyclable materials at distribution centres as well as costs related to Perekrestok.ru and express last mile delivery from gross profit. The income from sale of recyclable materials at distribution centres is now reported under lease/sublease and other income. Costs related to Perekrestok.ru and express last mile delivery are now reported under SG&A expenses, mostly in staff costs and other expenses. The net effect on the Q2 gross margin from reclassifications was slightly positive.

(3) Please note that in this and other tables, and in the text of this press release, immaterial deviations in the calculation of % changes, subtotals and totals are due to rounding.

(4) Net retail sales represent revenue from the operations of X5-managed stores net of VAT. This number differs from revenue, which includes proceeds from wholesale operations, direct franchisees (royalty payments) and other revenue.

(5) Adjusted EBITDA is EBITDA before costs related to the LTI programme, share-based payments and other one-off remuneration payments expense.

(6) Adjusted net profit is net profit before one-off impacts of the Karusel transformation (mainly due to impairment and accelerated depreciation of non-current assets related to the transfer of stores to Perekrestok).

(7) Excluding Perekrestok.ru

Note to Editors:

X5 Retail Group N.V. (LSE and MOEX: FIVE, Fitch - 'BB+', Moody's - 'Ba1', S&P - 'BB+', RAEX - 'ruAA+') is a leading Russian food retailer. The Company operates several retail formats: the chain of proximity stores under the Pyaterochka brand, the supermarket chain under the Perekrestok brand and the hypermarket chain under the Karusel brand.

As of 30 June 2020, X5 had 17,025 Company-operated stores. It has the leading market position in both Moscow and St Petersburg and a significant presence in the European part of Russia. Its store base includes 16,096 Pyaterochka proximity stores, 867 Perekrestok supermarkets and 62 Karusel hypermarkets. The Company operates 42 DCs and 4,083 Company-owned trucks across the Russian Federation.

For the full year 2019, revenue totalled RUB 1,734,347 mn (USD 26,791 mn), Adjusted EBITDA under IAS 17 reached RUB 127,380 mn (USD 1,968 mn), and net profit under IAS 17 for the period amounted to RUB 25,908 mn (USD 400 mn). In H1 2020, revenue totalled RUB 962,625 mn (USD 13,876 mn), adjusted EBITDA reached RUB 74,834 mn (USD 1,079 mn), and net profit amounted to RUB 24,450 mn (USD 352 mn).

X5's Shareholder structure is as follows: CTF Holdings S.A. - 47.86%, Intertrust Trustees Ltd (Axon Trust) - 11.43%, X5 Directors - 0.09%, treasury shares - 0.01%, Shareholders with less than 3% - 40.61%.

Forward looking statements:

This announcement includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the fact that they do not only relate to historical or current events. Forward-looking statements often use words such as "anticipate", "target", "expect", "estimate", "intend", "expected", "plan", "goal", "believe", or other words of similar meaning.

By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances, a number of which are beyond X5 Retail Group N.V.'s control. As a result, actual future results may differ materially from the plans, goals and expectations set out in these forward-looking statements.

Any forward-looking statements made by or on behalf of X5 Retail Group N.V. speak only as of the date of this announcement. Save as required by any applicable laws or regulations, X5 Retail Group N.V. undertakes no obligation publicly to release the results of any revisions to any forward-looking statements in this document that may occur due to any change in its expectations or to reflect events or circumstances after the date of this document.

Elements of this press release contain or may contain inside information about X5 Retail Group N.V. within the meaning of Article 7(1) of the Market Abuse Regulation (596/2014/EU).